SOURCE:
"Most economic analyses of the House’s Consumer Fuel Price Gouging Protection Act have focused on the impact of price controls. But, viewing this bill in the context of eliminating gas-powered vehicles yields different insights.
To phase out gas-powered cars, the quantity of gas sold must fall to zero. Americans used 140 billion gallons of gas in 2019 prior to the pandemic. Imagine a strict 20-year schedule reducing the quantity of gas sold by perhaps 5 to 10 billion gallons each year until reaching zero. The policies to accomplish this -- subsidies for electric vehicles, limits on the sale of gas-powered cars -- will reduce quantity in fits and starts. But, let’s simplify and imagine a detailed schedule of declining sales.
Such a policy, if in place, would impose quantity controls on the gas market. The market supply curve would be vertical at that year’s quantity and the price would be determined by demand at that quantity. Demand curves slope downward, so the reduction in quantity of gas would produce an escalating price, although fewer gas-powered cars on the road would shift the market demand curve to the left.
Alternatively, setting the quantity is equivalent to setting a price. Quantity controls decreasing to zero is like laws raising the price to infinity.
The economic impacts of a price ceiling with a quantity control in place differ from when the market would otherwise reach equilibrium. Normally, a price ceiling reduces the quantity of gas supplied and results in shortages. This has been the focus of economic commentary. However, quantity control already limits the quantity. Letting the price rise merely moves us up a vertical supply curve, not up and along a positively sloped supply curve.
A price ceiling normally prevents the standard functioning of a rising price in a market: signaling to producers that consumers want more gas and rewarding the producers who supply more gas with profits. The quantity control does not allow more gas onto the market. Opponents of global warming do not want more oil supplied, period.
A price ceiling is not nearly as costly with a quantity control in place as when the market could be in equilibrium. Capping the retail price now at, say, $4 per gallon if we were ending the use of gas might make sense.
I do not favor banning gas-powered vehicles because they generate enormous value and global warming is not an existential threat. So, how does a price ceiling impact the market if a phaseout is being contested?
Negatively. The U.S. fossil fuel industry faces enormous regime uncertainty, a term coined by economist Robert Higgs to help explain the collapse of private investment during the 1930s. Dr. Higgs argued that because of the hostility of New Deal planners to private property and markets, businesses might legitimately have feared a restructuring of the American economy. This did not happen, but the prospect contributed to anemic business investment.
The Biden administration has noted “weak” industry interest in oil and gas leases. As the Institute for Energy Research notes, this is largely due to the Biden administration’s opposition to fossil fuels. Personally, I do not see how investing in U.S. oil production makes economic sense; the risk of a premature, permanent shutdown seems too great.
Regime uncertainty increases risk. Encouraging investment in the face of risk (presuming the underlying risk cannot be reduced) requires high returns. Record-high gas and diesel prices might allow investors to earn enough in 10 or even five years of production to make an investment today profitable even given the risk of a potential future ban on U.S. oil production. Fortunately, the Consumer Fuel Price Gouging Protection Act appears unlikely to pass the Senate, but gas price controls at this point threaten to choke off U.S. oil production entirely."
Author Dan Sutter (dsutter@troy.edu) is Affiliated Senior Scholar at the Mercatus Center and Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University.